Tuesday, February 24, 2009

Middle path on emissions is like doing nothing

THE Rudd Government's carbon pollution reduction scheme, better known as the emissions trading scheme, is under attack from all quarters. When opposing interest groups condemn their proposals, Labor governments often believe that they have picked a policy winner, that bipartisan dissatisfaction indicates the path between extremes.

But sometimes the middle path is simply no path at all. Indeed, most environmentalists think that the scheme must not be passed by Parliament in its present form.

The white paper on the scheme clearly outlines the policy design criteria by which the scheme should be judged and, in at least four respects, it fails.

First, the scheme must have environmental integrity. It must support the key objective of the UN Climate Regime, to avert dangerous climate change.

The present scheme fails this most critical test because its targets are so weak. A cap and trade scheme is intended to reduce emissions at a rate that reflects best scientific advice for tackling global warming.

In 2007, the Intergovernmental Panel on Climate Change indicated that developed countries as a group need to reduce their emissions by between 25 per cent and 40 per cent below 1990 levels by 2020 to help keep global greenhouse gas concentrations below 450ppm.

Leading climate scientists have recently indicated that the rate of emissions has increased in the past decade and therefore cuts need to be deeper and faster if we are to avert dangerous climate change and spare iconic sites such as the Great Barrier Reef, and Australia's food basket, the Murray-Darling, from permanent devastation.

The scheme proposes a medium range emissions cap target of 5 per cent below 2000 levels by 2020, or 15 per cent if a "truly global" treaty emerges. It also permits a slight increase in national emissions before a subsequent gradual reduction over its first five years.

Targets set at these lax levels will be very hard to change for the first five years, and probably for the entire period to 2020. Even the 5 per cent target is far from secure.

The scheme allows companies to buy an unlimited number of international carbon permits to offset domestic emissions. Recent Treasury modelling projects that with such access to international permits Australia's domestic emissions wouldn't fall under minus 5 per cent until 2035. All this is wildly at variance with current scientific advice.

Second, the scheme has to be economically efficient. An efficient emissions trading scheme puts a "real" price on carbon — one that factors in the social and ecological impacts of carbon pollution, and drives investor and consumer behaviour accordingly. In the current economic climate, the threat of carbon leakage and job losses has panicked the Government into compensation measures that are economically unjustifiable and seriously weaken the scheme's price signal.

Instead of auctioning all permits, some 25 per cent will be issued free to the coal-fired power sector and to energy intensive trade exposed industries. In all, $7.4 billion worth of free permits given to these sectors and coal-fired power generators over the first two years alone. This will seriously weaken the carbon price. Such assistance is especially problematic as many of these companies have significant untapped capacities to reduce emissions. Without demands for change in performance, these transfers will merely serve as barely hidden subsidies and protectionist measures.

Third, the scheme should promote international objectives. Our aim must be an international climate treaty that minimises the risk of dangerous global warming to Australia. Yet the Rudd Government, with its

5 to 15 per cent target, appears — like the Howard government at Kyoto in 1997 — to be seeking special consideration "in the national interest" and flagging that Australia will lower the bar for all international negotiators at Copenhagen.

If we nevertheless are allotted a much more stringent target in Copenhagen, then the Australian taxpayer would be required to buy international credits to supplement the shortfall, something present deficit estimates do not consider.

Fourth, the scheme must be fair. Here the flaws of the present scheme are subtler. About half of the revenue from the auction of permits — about $6.3 billion — would be spent on compensation and fuel tax adjustment. Rightly, a significant proportion will be used to compensate low-income households against the regressive effects of energy price rises.

But why do we need a fuel tax adjustment of $2.4 billion, especially given the current level of petrol prices? More importantly, why do middle-income households need assistance at all? Again, the carbon price signal is diminished.

Much fairer for present and future generations would be to use this part of the revenue for genuine mitigation and adaptation measures. Yet climate adaptation gets nothing, despite the clear and growing need.

Fairer too, would be to credit the significant efforts of many Australians to reduce their household emissions by progressively reducing the cap. At present, the emissions they save are simply made available elsewhere in the economy.

The scheme in its present form carries a high risk of failing to reduce emissions in the short term, locks us into insufficient targets until 2020, and may help weaken international negotiations. It is far from the measure of decisive leadership we now need and can afford.

Peter Christoff teaches climate policy at the University of Melbourne and is vice-president of the Australian Conservation Foundation.